Reynolds Consumer Products Inc.

Greetings. Welcome to the Reynolds Consumer Products Inc. Third Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Mark Schwartzberg, Vice President of Investor Relations. Thank you. You may begin.

Thank you. Good morning, and thank you for joining us on Reynolds Consumer Products' third quarter 2021 earnings conference call. On the call today are Lance Mitchell, President and Chief Executive Officer, and Michael Graham, Chief Financial Officer. For our agenda today, Lance will focus on market conditions and our fundamentals, and Michael will review our quarter and outlook. Together, our remarks will be approximately 15 minutes, then we will open it up for your questions. During the course of this call, management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and involve risks and uncertainties that could cause actual results and outcomes to differ materially from those described in these forward-looking statements. These refer to Reynolds Consumer Products' annual report on Form 10-K and other reports filed from time to time with the Securities and Exchange Commission and its press release issued this morning. for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please note, management's remarks today will focus on non-GAAP or adjusted financial measures. Reconciliation of GAAP measures to non-GAAP financial measures is available in the earnings release posted under the investor relations heading on our website at ReynoldsConsumerProducts.com. The company has also prepared a few presentation slides and additional supplemental financial information, which are posted on Reynolds' website under the Investor Relations heading. This call is being webcast, and an archive of it will also be available on the website. While we would like to answer all of your questions during the question and answer session, in the interest of time, we ask that you ask one question and a follow-up, and rejoin the queue if you have additional questions. And now I'd like to turn the call over to Lance Mitchell.

Thank you, Mark. We delivered another quarter in line with our expectations in spite of additional cost and supply chain challenges, thanks to the hard work and dedication of our team. We grew revenue 10% on top of last year's record third quarter net revenues, including an approximate two percentage point benefit from a one-time sale of excess raw materials in the quarter. We did so in spite of production disruptions at third-party suppliers and continued import delays. Our market shares remain strong across most of our products, and we achieved our earnings forecast in the face of additional material, labor, and logistics costs in a more challenging environment for staffing and logistics services. We are narrowing our earnings guide, within our previous range to reflect additional staffing and supply chain pressure, as well as higher rates for key commodities versus July levels. Micah will walk through those drivers of this pressure and the pricing actions we are taking to offset material cost increases. I remain firmly committed to implementing price increases to offset material cost increases at a pace and amount appropriate to market conditions. Michael will also talk through revolution cost savings, which are tracking ahead of plan and remain a significant source of margin recovery. Increased investment in automation is a major contributor to revolution cost savings. Now, let's return to the top line. We expect four factors to drive accelerating revenue growth for RCP in the fourth quarter. They are consumer demand, price increases, innovation, and expanded manufacturing and supply chain capabilities. Together with our market share performance, we expect these drivers to remain a sustained source of long-term growth. First, consumer demand. Household use of our products remain elevated versus pre-pandemic levels. According to our latest Harris Poll, which we conducted again in September, Everyday use of foil is up more than four-fold versus pre-pandemic levels. And weekly use of waste bags and food bags is up more than 30% versus pre-pandemic levels. In addition, according to our fourth numerator poll, the overwhelming majority of respondents continue to expect to maintain or increase their foil, waste bag, and food bag use beyond 2021. Our household penetration has increased from pre-pandemic levels with 24 of 25 households now having one or more of our products. This sets up our categories, our brands, and our product portfolio for continued strong performance, and that's what we're seeing. On an omni-channel basis through October 10th, Branded dollar share in foil, waste bags, and disposable cups and dishes is up versus year-ago levels and improving sequentially. These figures include e-commerce and in track channels, it's the same trend. Brand dollar share in foil, waste bags, and disposable cups and dishes higher than year-ago levels and improving sequentially. We're also building on our e-commerce momentum. E-commerce is Related sales are growing strong double digits. Growth is broad-based across RCP and major e-commerce retailers. And we continue to expand, participating in third-party marketplaces while also testing and launching direct-to-consumer initiatives. The next driver of our revenue growth is price. Our third round of pricing actions was implemented as planned, and a fourth round goes into effect during the first quarter of next year. We expect sequential improvement in profitability in the fourth quarter and a pronounced improvement in profitability by the end of the first quarter of 2022 as a result of these increases. This assumes key commodity rates stabilize. Michael will speak more to the timing and results of our pricing actions in a moment. I know that elasticity is also a topic of interest to all of you. We're watching that closely, given the amount of pricing across retail. As you know, historically, our categories have demonstrated low elasticity by comparison to many consumer staple categories. That remains the case. And we factored our latest research on elasticity into our guide. The third driver of our strong growth is innovation. Hefty, Fabuloso, continues to exceed our expectations and drive volume thanks to Hefty's quality, consumer preference for Colgate-Palmolos Fabuloso scent, and our sales and category management teams' effectiveness partnering with our retail customers. In fact, Hefty Fabuloso helped drive Hefty Waste and Storage past $1 billion in annual retail sales for the first time in the quarter. Cooking and baking results are also seeing a substantial benefit from new products, strengthening our market position, bringing us into new adjacencies, and expanding the scope of our sustainable offerings. Notable Reynolds innovations include Reynolds Wrap everyday nonstick foil, Reynolds Wrap 100% recycled foil, and Reynolds Kitchen's unbleached and compostable parchment paper. In tableware, EcoSave is now the number one sustainable brand in disposable tableware, according to IRI. And innovation in store brands also contributed to our strong performance across RCP categories, including share gains for our Presto unit and private label food bags. I also hope that you saw the recent release of our ESG scorecard. The scorecard provides baseline metrics for evaluating our performance against the goals we announced in April. Development and expansion of sustainable products is integral to our business. We've introduced numerous sustainable product solutions and have more in the pipeline for introduction in 2022. We're also on track to achieve our goal of a sustainable option in all product lines by 2025. Our fourth growth driver is expanded manufacturing and supply chain capabilities. The capacity additions we undertook last year have allowed us to maintain strong market shares and retailer in stocks for most of our products remain well above pandemic related lows. These and other improvements to our manufacturing and supply chain capabilities position us well in our categories. Having said that, we're not immune to the staffing and logistics related pressures across the economy. and we're actively working to minimize related disruptions to production and shipment of our products. Before I pass the call over to Michael, I'd like to leave you with the following. Our business remains strong, and we have a history of dependable volume, earnings, and cash flow. We have the brands, the product portfolio, the category management team, the manufacturing and supply capabilities, the pricing actions, the cost savings, and most of all, the people, to position us for substantial improvement in earnings growth when inflation moderates and over the long term. I look forward to our future growth and success for our company, our partners, and our shareholders.